Subsidies and Sustainability in Microfinance
This paper presents empirical evidence on the impact of subsidies on microfinance institution (MFI) performance. It uses data from the financial statements gathered by two leading microfinance rating agencies - PlaNet Rating and Microfinanza. The paper analyzes:
- The impact of subsidy on sustainability of MFIs;
- Effects of subsidies for poverty indices, moral hazard inefficiencies and pricing distortions of MFIs.
It concludes that:
- Subsidies to MFIs are associated with lower sustainability because they tend to fall onto institutions that target poor customers, with higher unit costs;
- Subsidies are required to ensure that MFIs remain faithful to their mission of bringing credit to the poorest, who cannot afford commercial microfinance based products.